Chapter 11, Problem 1P

1.

To determine

Find the number of shares authorized, shares issued, and shares outstanding of Corporation N.

Explanation of Solution

Shares:

The common stock is divided into smaller units of equal value called as Shares and issued to the public, to raise funds.

• The shares authorized by the Corporation N are 200,000 shares.
• The number shares issued by the Corporation N is 125,000 shares.
• The number of shares that stands outstanding in the Corporation N is 122,000 shares.

Working Notes:

Calculate the number of shares issued.

$\begin{array}{c}\text{Shares Issued = }\frac{\text{Amount of cash collected from stock issuance}}{\text{Issue price per share}}\\ =\frac{\$2,125,000}{\$17}\\ =125,000\text{ shares}\end{array}$

Calculate the number of shares outstanding.

$\begin{array}{c}\text{Shares Outstanding = Shares issued}-\text{shares held as treasury stock}\\ =125,000-3,000\\ =\text{122,000}\end{array}$

2.

To determine

Ascertain the balance in the additional paid-in capital account.

Explanation of Solution

Additional paid-in capital: The excess amount raised from the stock issuance above the par value represents additional paid-in capital.

Calculate the additional paid-in capital.

$\begin{array}{c}\text{Additional paid-in capital =}\left(\begin{array}{l}\text{Issue price per share}-\\ \text{Par value of the share}\end{array}\right)\times \text{ No}\text{. of shares issued}\\ \text{=}\left(\$17-\$10\right)\text{}\times \text{125,000 shares}\\ \text{= \$7}\times 125\text{,000 shares}\\ \text{= \$875,000}\text{. }\end{array}$

Therefore, the amount of additional paid-in capital balance is $875,000.

3.

To determine

Ascertain the amount of earnings per share.

Explanation of Solution

Earnings per share:

Earnings per share represent the amount of income earned per share of outstanding common stock in a period. This ratio is used for analyzing the profitability of company’s stockholders.

The following formula can be used to calculate earnings per share:

$\text{Earnings per share}\text{= }\frac{\text{Net income}\left(\text{loss}\right)\text{ – Preferred dividends}}{\text{Average number of common shares outstanding}}$

Calculate the amount of earnings per share.

$\begin{array}{c}\text{Earnings per share = }\frac{\text{Net income for the current year}}{\text{Shares Outstanding}}\\ =\frac{\$240,340}{122,000\text{ Shares}}\\ =\text{\$1}\text{.97}\end{array}$

Therefore, the earnings per share are $1.97.

4.

To determine

Determine the amount of dividend paid per share.

Explanation of Solution

Cash dividend: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Calculate the amount of dividend paid per share.

$\begin{array}{c}\text{Dividends paid per share = }\frac{\text{Dividends paid during the current year}}{\text{Shares outstanding}}\\ =\frac{\$123,220}{122,000\text{Shares}}\\ =\text{}\text{\$1}\text{.01}\end{array}$

Therefore, the amount of dividend paid per share is $1.01.

5.

To determine

Ascertain the balance sheet section in which treasury stock should be reported, and determine the amount reported as treasury stock.

Explanation of Solution

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

The treasury stock should be reported in the stockholder’s equity section of the balance sheet.

Reported amount of treasury stock is $60,000.

Working Note:

$\begin{array}{c}\text{Treasury stock = }\left(\text{Shares in treasury stock}\right)\times \text{Cost per share of treasury stock}\\ \text{= 3,000 Shares}\times \text{\$20 }\\ \text{= \$60,000}\end{array}$

6.

To determine

Ascertain the par value per share and outstanding number of shares after the 2-for-1 stock split.

Explanation of Solution

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Stock Splits: It is a method of increasing the total number of outstanding shares thereby, reducing the market price of each share, however, keeping the corporation’s total market value constant.

Outstanding stock: It refers to the number of shares that are held by the existing stockholders of the company.

Determine the par value per share after the 2-for-1 stock split.

$\begin{array}{c}\begin{array}{l}\text{Par value per}\\ \text{share after stock split}\end{array}\}\text{ = Par value per share of common stock }\times \frac{1}{2}\\ =\$10\times \frac{1}{2}\\ =\text{\$5}\text{.00}\end{array}$

After the 2-for-1 stock split, the par value per share of Corporation N will be $5.00.

Determine the outstanding number of shares after stock split.

$\begin{array}{c}\begin{array}{l}\text{Outstanding number of}\\ \text{shares after stock split}\end{array}\}\text{= Outstanding number of shares before stock split}\times 2\\ =122,000\text{ shares}\times 2\\ =244,000\text{ shares}\end{array}$

After the 2-for-1 stock split, the outstanding number of shares after stock split of Corporation N will be 244,000 shares.

7.

To determine

Provide Journal entry to record the stock split, if required.

Explanation of Solution

Stock Splits: It is a method of increasing the total number of outstanding shares thereby, reducing the market price of each share, however, keeping the corporation’s total market value constant.

2-for1 stock split increases increase the number of shares by double and decrease the stock price per share by half.

Stock split does not affect total assets, total liabilities, or total stockholders’ equity. Hence, no journal entry is required to be passed.

8.

To determine

Provide journal entry to record the stock dividend.

Explanation of Solution

Stock Dividends: It refers to the payment of dividends by a company to its existing shareholders, in the form of additional shares rather than cash. Stock dividends are paid, when there is inadequate cash available in the company.

Corporation N has declared 10% stock dividend, hence this is a small stock dividend.

Prepare journal entry to record the small 10% stock dividend.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
	Retained Earnings (–SE) (1)	256,200
	Common Stock  (+SE) (2)		122,000
	Additional Paid –in Capital (+SE) (balancing figure)		134,200
	(To record the declaration of small stock dividend)

(Table 1)

• Retained earnings are a component of stockholder’s equity and there is a decrease in the value of equity. Hence, it is debited.
• Common stock is a component of stockholder’s equity and there is an increase in the value of equity. Hence, it is credited.
• Additional paid-in capital is a component of stockholder’s equity and there is an increase in the value of equity. Hence, it is credited.

Working Notes:

Calculate the amount of decrease in retained earnings.

$\begin{array}{c}\begin{array}{l}\text{Decrease in}\\ \text{Retained Earnings}\end{array}\}\text{= }\left(\begin{array}{l}\text{Common stock outstanding }\times \text{ \% of stock dividend issued}\\ \times \text{ price of per share}\end{array}\right)\\ =\left(122,000\text{Shares }\times \text{ 0}\text{.10}\times \text{ \$21}\right)\\ =\text{\$256,200}\end{array}$        (1)

Calculate the amount of increase in the value of common stock.

$\begin{array}{c}\begin{array}{l}\text{Increase in the}\\ \text{Common stock}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Common stock outstanding }\times \text{ \% of stock dividend issued}\\ \times \text{ par value of share}\end{array}\right)\\ =\left(122,000\text{Shares }\times \text{ 0}\text{.10}\times \text{ \$10}\right)\\ =\text{\$122,000}\end{array}$        (2)

Note: SE in journal entry represents Stockholders’ equity.